Australia raises rates to 3.5%

Australia's central bank on Tuesday raised interest rates for the second time in just over a month as evidence mounts the nation's economic recovery is building momentum.

The Reserve Bank of Australia lifted its benchmark rate from 3.25 to 3.5 per cent with economists predicting further increases as early as next month.

The decision to tighten monetary policy reflects concerns inflation is in danger of moving outside the central bank's target range and fears of an asset bubble in Australian house prices.

Australia last month became the first Group of 20 nation to raise rates since the onset of the financial crisis. Other countries that have raised rates this year include Norway and Israel.

The Australian government on Monday upgraded its economic growth forecast for the 12 months ending June next year to 1.5 per cent, a significant turnaround on the 0.5 per cent contraction for the same period it had predicted only six months ago. In the 2010-11 financial year, it expects the economy to expand by 2.75 per cent. Canberra also this week forecast that unemployment would peak at 6.75 per cent, rather than its previous estimate of 8.5 per cent.

In raising rates, the RBA said the global economy had resumed growth and the recovery was set to continue next year.

"The expansion is generally expected to be modest in major countries," Glenn Stevens, RBA governor, said. "[But] Prospects for Australia's Asian trading partners appear to be noticeably better."

"With the risk of serious economic contraction in Australia now having passed, the board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared much weaker."

He added that the rate increases in October and November would help boost the "sustainability" of economic growth and "keep inflation consistent with the target over the years ahead".

The improved outlook in Australia comes amid signs of recovery in global industrial production.

Joseph Capurso, currency strategist at Commonwealth Bank of Australia, said the strength of China's industrial production was particularly important for Australia.

"Most of our exports to China are commodities used by its manufacturers. Around 80 per cent of Australia's exports ... to China stay in China rather than being processed and re-exported," he said.

He added that Australia's exports to China reflected domestic demand rather than indirect demand from advanced economies.

"Chinese domestic demand is growing strongly -- even by Chinese standards," Mr Capurso said.

(Published by CNN - November 2, 2009)